The school was established according to the instructions of George Watson (1654–1723) who bequeathed the bulk of his fortune of £12,000 – a vast sum in 1723 – to found a school for the provision of post-primary boarding education.

Watson was never a member of the Merchant Company of Edinburgh, but he was impressed by their running of the Merchant Maiden Hospital and so he chose the Company to implement the terms of his will. After some years, the Governors bought land known as Heriot's Croft, located off Lauriston Place in Edinburgh, close to the Meadows and opposite George Heriot's School, and engaged an architect. The foundation stone was laid on 22 May 1738, and the building was completed early in 1741. (At the time, there was concern that this site was too far from the city, but today it would be regarded as close to the city centre.)

The school opened as George Watson's Hospital on Whitsunday, 17 May 1741. The initial roll consisted of 11 boys, aged 9–10 years; by 1749 there were 30, while in 1842 pupils numbered 86, this figure being maintained until the end of the Hospital system in 1870.[4]

In accordance with Watson's will, the governors were responsible for former pupils up to the age of 25; they were helped to find apprenticeships and paid an allowance. Watson's stated preference was for allowing the hospital's charges to become skilled workers, though the governors also allowed boys who showed an ability to pursue medicine or academia.[5]

By the 1860s, the hospital school system had fallen into general public disrepute, while the Merchant Company was fearful both of government intervention in the schooling system and of its own decline. The solution was to re-found Watson's, and the three other hospitals under its governorship, as day schools. In July 1868 the Company applied to Parliament for powers to reorganise their schools and make different use of their endowments to as to make education more widely available.

Watson's was thus completely transformed, reopening on 26 September 1870 as a fee-paying day school with a roll of 800 boys, initially called George Watson's College Schools for Boys.

In 1869, the original hospital building was sold to the Royal Infirmary of Edinburgh. When the infirmary sought to expand in 1871, the school moved a short distance west to the former Merchant Maiden Hospital building in Archibald Place. The original hospital building was incorporated into the infirmary, and the chapel remained in use as the hospital chapel until the infirmary was itself moved away. The remains of the building were demolished in 2004 during the redevelopment of the infirmary site by the Quartermile consortium,[5] which also redeveloped the site of the Archibald Place buildings, which had been demolished in the 1930s after the school moved to its present site.

In the years following World War I, the Edinburgh Royal Infirmary needed to expand once more and was interested in the site then occupied by Watson's. At the same time, the Archibald Place building was cramped and in need of modernisation, as well as being distant from the school's playing fields at Myreside. In 1924 the Merchant Company announced that they had taken the decision to sell the Archibald Place building to the Infirmary for a "fair" price.

In 1927, agreement was made to acquire the site of Merchiston Castle School – adjacent to the Myreside playing fields – and a competition was held to design the new school building. The winner was announced in June 1928 as James B Dunn, himself a Watsonian, with a plan described as "simple, direct and masterly".

Building work on the new site commenced in August 1929. The new building, facing Colinton Road, was in a neo-classical style and sandstone-faced. It is H-shaped, extending over two stories, with a large central Assembly Hall which seats up to 1835.

The new building was completed in 1932. It was opened on 22 September by HRH Prince George (later Duke of Kent).

The Golden Jubilee of the creation of the 1932 buildings fell in 1982, and was marked by a number of celebrations. These culminated on 29 June with a visit from Her Majesty Queen Elizabeth. The Queen spent two hours touring the campus, including a short concert, and she unveiled a commemorative plaque.[5]

George Square Melville House, built in 1871 on the site of Admiral Duncan's house, was the home of George Watson's Ladies College until sold to Edinburgh University in 1974.

The reforms, which saw the hospital's transformation into a day school, also saw the Merchant Company wish to open a school for girls. In July 1868, the Company applied to Parliament for powers to reorganise their schools and make different use of their endowments to as to make education more widely available.

In February 1871, the Company took over the lease of Melville House in George Square, Edinburgh and used it as the location of the nascent George Watson's College Schools for Young Ladies. It was renamed to George Watson's College for Ladies in 1877, and to George Watson's Ladies College in 1890.[5]

In 1967, the Merchant Company announced its plan to combine the two Watson's Colleges to form a single co-educational campus in Colinton Road. Building work was required to house the combined school.

The first joint assembly of the amalgamated school was held on 1 October 1974. The school found itself in the Guinness Book of Records as the largest co-educational school in Scotland, with a roll of over 2,400 pupils.[5]

Since then the school has remained co-educational, and now serves day pupils only; previously various boarding houses (nick-named "bug-huts") were maintained from time to time in the Spylaw Road area, and on-campus at New Myreside House.